1.7.2 Tradable Pollution Permits Game
Instructions
Each member of the class will be in charge of a business which emits CO2 pollution. Our goal is to reduce our overall cabon emissions so that we can correct this market failure.
Your Firm:
- Type:
- Current Emissions: tonnes
- Cost of reducing emissions by 1 tonne: £
Situation 1: Everybody Reduces Emissions
In this first situation the government has mandated that each business must reduce its emissions to 1,000 tonnes of carbon.
Calculate how much this will cost for your firm:
Correct! It will cost you £ to reduce your emissions.
Compile this information as a class, so we can see how much it cost to reduce our emissions.
When you are ready to move on, click here:
Hmm . . . not quite correct. Review your work and try again.
Want a hint?
Situation 2: Cap and Trade System
We are going to reduce our emissions, but this time we are going to use a different system.
Instead of forcing all firms to reduce their emissions, the government will give each firm permits for the right to pollute. Each firm will initially have the permits to emit 1,000 tonnes of carbon. You can either use these permits so that your firm can emit carbon, or you can sell them to other firms so that they can emit carbon. The key is that once the trading is done, you must only pollute as much carbon as you have permits for. If you don't have enough permits, you will need to reduce your carbon emissions until it matches the number of permits you have. If you sell all your permits, this means that you will have to reduce your emissions to zero.
Buy and sell permits with other firms around the room. It's up to you to negotiate the price of permits. Record all trades in the form below. You can keep trading until nobody wants to trade anymore.
| Permits | Money | |
|---|---|---|
| Initial Balance | 1,000 | £0 |
Selling to
How many permits are you selling to ?
What is the price per permit?
Buying from
How many permits are you buying from ?
What is the price per permit?
when you're done dealing and you want to review your final position. You should only do this when you are sure you can't make any money by doing more trades.
If you want to cancel all the deals and start with a new table, click this button:
Review
Now that you're done with your permit trading, you can commence with your polluting. Remember that you can only pollute for as many permits as you've traded for, so you'll have to reduce any excess emissions until it reaches the level of your permits.
You've got enough permits to emit tonnes of pollution. Your production process requires tonnes of pollution. You will need to reduce your pollution by tonnes.
It costs you £ to reduce each tonne of emissions.
How much do you still have to spend to bring your emissions down to the level of your permits?
What is your overall financial position, including the money that you gained/lost from trading the permits?
It will cost you £ to reduce your emissions to the required level.
Your closing balance from the end of permit trading is £.
Your overall financial position is £.
Summary
In Situation 1, it cost you £ to reduce your emissions.
In Situation 2, your overall financial position is £.
- Are you financially better off under the Situation 1 or Situation 2? Why is that?
- What do you expect will be the collective position of the whole class? Is society better off under Situation 1 or Situation 2? (We will review all financial positions as a class)
- Explain why tradable pollution permits are an efficient way of solving market failure arising from CO2 emissions.